Thursday, October 8, 2009

Japan leads Asia-Pacific ABS recovery

Eight Japanese ABS transactions were completed towards the end of September, making it one of the few Asia-Pacific countries where primary ABS and RMBS issuance is continuing. However, there are signs that investor appetite is now beginning to improve in other Asian financial centres.

Here, SCI talks to Moody's analysts about existing and potential securitisation activity across the region.

Activity in Japan

"ABS is currently one of the most active sectors in the Japanese structured finance market due to investor appetite for a diversified portfolio and stable rating performance," says Yusuke Seki, svp at Moody's in Japan. "There have been no rating downgrades for recent-year issues, except in the very esoteric areas."

He adds: "Investor appetite has been recovering following a difficult patch in late 2008 and investors have money to invest. Insurance companies and banks - especially Japanese megabanks - are now enthusiastic about buying this type of asset."

Moody's has rated about 30 deals so far this year, amounting to ¥500bn/US$5bn. The agency anticipates more issuance over Q409, with upward potential in volume in the latter part of 2010.

The origination of new mortgage loans in Japan has, however, been on a decreasing trend due to the economic downturn over the past year. As a result, issuance of Japanese RMBS has also been shrinking.

"Last year we rated 40 RMBS, but so far this year we have just rated 20," says Yasushi Furuya, vp and senior credit officer at Moody's in Japan. "Japanese issuers have historically issued RMBS in order to hedge interest rate risk. However, as it is expected that interest rates will remain low for the foreseeable future, it is not so important for originators to hedge this risk. This also explains why RMBS issuance is decreasing."

Currently, mortgage loan default and delinquency rates are not particularly high in Japan, and obligors are generally able to pay their mortgage loans. One reason for this is Japanese banks' strict screening criteria for obligors, meaning there are practically no sub-prime mortgage loans in the country.

"Nevertheless, the unemployment rate is going up (historic high of 5.7% at the end of July) and some economists predict it could go as high as 6% this year," adds Furuya. "At that point, we may see delinquency rates going up and the performance of RMBS deteriorating somewhat. However, in terms of ratings, downgrades of Japanese RMBS are very limited."

CMBS activity in Japan is also limited for the time-being. Tetsuji Takenouchi, svp at Moody's, explains that the asset class is a fundamentally distressed sector.

"The majority of market participants that have been involved in the sector in the past are not actively involved at the moment, so most participants now are domestic banks," he says. "As there are no government support programmes, such as the TALF in Japan, only private sector transactions are structured. We've also seen some existing programmes being refinanced."

Small steps in Korea

The cross-border Korean ABS market has recently seen the first issuance of a benchmark RMBS in over a year. The US$669m dual-currency deal from Shinhan Bank is understood to have been arranged by HSBC and BNP Paribas.

According to Marie Lam and Jerome Cheng, vps at Moody's, Korea was - and still is - a major market for cross-border securitisation transactions in ex-Japan Asia. However, since Lehman's bankruptcy, just a handful of transactions were completed this year in the region

"I doubt there will be many more public transactions for the remainder of 2009. There may be some private deals, but pricing issues are hindering issuance," they say. "Although the cross-currency swap market gives some pricing benefit, the all-in price for cross-border issuance is generally higher than local funding alternatives."

All outstanding Korean ABS were downgraded last month by Moody's when it lowered the country's currency ceiling (see SCI issue 151). However, Lam and Cheng note that the performance of Korean structured finance bonds has been very good.

"Delinquencies and defaults remain at low levels. Although the underlying asset performance may deteriorate, we don't expect the ratings of the bonds to be hit: The rating outlook is still stable," they say.

Singapore CMBS refinancing solutionsThe Singaporean structured finance market, previously dominated by CMBS issuance, has also seen conditions improve during the course of 2009. Five CMBS needed to refinance in 2009 and - despite concern that this would be difficult - four of the five have now refinanced using various different methods, such as bank loans, rights issues or CMBS. The sponsor of the remaining deal has already found a funding source to repay the maturing debt.

The ratings on existing deals are also expected to hold up. "Cashflow from the underlying properties should still be healthy, despite the economic downturn. This is because the majority of deals were rated some time ago and have built up some cushion," continue Cheng and Lam.

For instance, because of the upcoming supply and reduced demand due to the economic crisis, the office sector will be under pressure in terms of both rental and occupancy rates. However, the rental rate at 2004-2006 was relatively low. So, even if offices are under pressure today, CMBS deals can still cope with the revised rental rate (the current rental rate is still higher than the 2004-2006 levels).

The analysts add: "Singapore CMBS deals have got strong debt service coverage ratios of more than 4x. However, as we have seen in other markets, mortgage loan borrower defaults may cause cashflow disruption. As S-REIT, the underlying CMBS borrowers, are an operating entity and may run into insolvency, we are currently reviewing its implication on the cashflow."

Nevertheless, some investors are showing renewed interest in the asset class. "We've also been approached with new proposals. This is a positive development, but it will take time for the markets to really pick up again," Cheng and Lam note.

Balance sheet CLOs

Demand for Asian arbitrage synthetic single-tranche CDOs has inevitably diminished, but several banks have completed balance sheet CLOs over the past couple of years - the majority of which reference Asian portfolios. "There is potential for some more balance sheet synthetic CLO transactions in the coming year," says Elaine Ng, vp and senior analyst at Moody's.

She concludes: "Other than that, we receive enquiries from time to time for non-leveraged transactions. These are not CDOs per se - more of a repackaging of an asset with an asset swap. It does not involve leverage. We're also seeing plain vanilla structures that are mainly exposed to the credit risk of one or a few reference entities."